Posts Tagged Jonathan Rikoon
Like many Americans, Mitt Romney has an individual retirement account. Unlike most Americans, Mr. Romney has between $20.7 million and $101.6 million in it, a big chunk of his fortune.
Experts on estate planning said it is highly unusual to accumulate such a considerable sum in an IRA, an investment vehicle restricted by annual contribution limits. It appears that Mr. Romney’s grew so large mostly because it holds investments in Bain Capital, the private-equity firm he helped start.
Under federal law, Mr. Romney isn’t required to pay annual taxes on the account’s investment gains, and the bulk of his contributions to the fund are likely to have been pretax dollars, IRA experts say. As such, the Romney IRA has enabled the current Republican front-runner to defer paying taxes on a sizable portion of his wealth—although he could face high tax bills when he eventually withdraws the money.
A Romney campaign aide said the tax treatment for his IRA “is the same for Gov. Romney as it is for every citizen of the U.S.”
Several estate-planning experts said they know of others with IRAs of more than $100 million, but they are rare. Typically, they said, that occurs when founders of companies invest in their own shares, which then take off.
Jonathan Rikoon, a lawyer at New York’s Debevoise & Plimpton LLP who advises private-equity-fund executives on estate planning, said Mr. Romney’s reliance on a tax-deferred retirement plan for so much of his wealth could end up costing him. An IRA allows a small immediate tax savings, plus deferral of taxes, he explains. But income from the account, when eventually withdrawn, will be taxed at the higher ordinary-income rate, not the lower capital-gains rate that might have applied if Mr. Romney had held the investments outside the fund.
“It’s probably not a slam dunk” from a tax-efficiency standpoint, he said. But Mr. Rikoon said it is impossible to tell without knowing the rest of Mr. Romney’s estate plan.
Mr. Romney is one of the richest presidential candidates in decades, and his GOP opponents increasingly are trying to turn wealth into a liability. President Barack Obama is expected to do the same if the former Massachusetts governor wraps up the nomination. Mr. Romney’s tax liability has emerged as a debating point in the GOP nominating contest, a proxy for a bigger argument over who should shoulder the nation’s tax burden.
In recent days, Mr. Romney’s rivals have pressed him to release his tax returns. They have attacked him for his role at Bain Capital, the source of his wealth. When Mr. Romney revealed Tuesday that his effective federal income-tax rate had been about 15% in recent years, both the White House and GOP candidates used the number as a cudgel.
Mr. Romney’s investments currently are held in a blind trust, meaning that he no longer makes decisions about individual holdings.
Asked last month about his taxes, Mr. Romney said: “I can tell you we follow the tax laws, and if there’s an opportunity to save taxes, we, like anybody else in this country, will follow that opportunity.”
The Wall Street Journal analyzed Mr. Romney’s latest federal financial-disclosure report, filed in August, to glean clues about his tax strategy.
IRAs were established to help people save money for retirement. They allow some holders to contribute a limited amount of pretax dollars each year to an account. It also is possible, in some cases, to contribute after-tax money. Investment gains generally accumulate tax-free until the holder begins to withdraw money during retirement.
Federal law also typically allows people to roll over into an IRA assets held in a workplace savings account, such as a 401(k) plan, after they leave an employer.
Mr. Romney’s retirement account wasn’t a Roth IRA, on which he would already have paid taxes, according to the campaign aide. He is required by law to begin withdrawing funds from his account beginning in 2017, when he reaches age 70½. Those withdrawals will be treated as ordinary income, which currently is taxed at a maximum federal rate of 35%. (For most Americans, IRAs make sense because their savings are so modest their retirement income won’t likely trigger high tax rates.)
The Romney aide declined to provide a precise value for Mr. Romney’s IRA account. According to his financial disclosure report, it was worth between $20.7 million and $101.6 million. The same disclosure form estimated Mr. Romney’s full wealth at between $84.8 million and $264.7 million. His campaign has said the actual figure is toward the upper end of that range, or $190 million to $250 million.
Mr. Romney reported his IRA produced income between $1.5 million and $8.5 million from the beginning of 2010 until Aug. 12 of last year.
Before he was elected Massachusetts governor in 2002, Mr. Romney’s main private-sector employer was Bain Capital, where he worked from 1984 to early 1999. During that era, the maximum annual pretax amount that could be contributed to an IRA was $2,000, and the maximum pretax contribution to a 401(k) plan was $30,000, including an employer match.
Michael Whitty, a lawyer at Vedder Price in Chicago who advises private-equity executives, said it is impossible to determine from Mr. Romney’s public disclosures how the IRA grew so large. Based on its listed holdings, which include many Bain Capital vehicles, Mr. Whitty theorizes Mr. Romney may have invested in Bain funds through a 401(k)-type plan, or directed some of his Bain holdings into such a plan, which he then rolled into an IRA.
Geoffrey Rehnert, a former Bain Capital partner who helped found the firm in 1984, said in that era it had a 401(k) plan that allowed employees to invest pretax dollars in its deals.
Mr. Romney’s aide said that the candidate “accumulated his IRA holdings through annual contributions, rollovers of sums in other retirement plans, and successful investments.”
Under current tax law, anybody investing an IRA in a private-equity fund, as Mr. Romney did, would likely incur a hefty special tax on “unrelated business income,” also known as UBIT. This tax, assessed at a maximum 35% rate, is meant to discourage tax-exempt entities such as an IRA, pension plan or endowment fund from unfairly competing with for-profit, taxpaying entities by operating a business without paying taxes on it. Investing in a partnership that uses debt to buy companies would trigger the tax, experts said.
It isn’t known whether Mr. Romney paid UBIT. His filings suggest use of a strategy involving offshore funds sometimes employed to avoid it, according to several experts.
One method used by tax lawyers is to have the IRA invest through an offshore affiliate of the private-equity firm, known as an offshore blocker corporation, which in turn invests the same money in the private-equity partnership. The tax is avoided because the IRA technically is investing in the offshore corporation, not in a private-equity partnership.
Tax experts say that might explain why Mr. Romney’s IRA includes holdings in Bain entities based in offshore locations, including one Cayman Islands entity that Mr. Romney listed as having a value between $5 million and $25 million.
Michael Knoll, a University of Pennsylvania law professor, said using offshore blocker corporations to avoid UBIT “is a form of tax planning that happens all the time.”
Asked about the offshore investments in Mr. Romney’s IRA, his aide said they were “in compliance with rules created to keep it tax deferred, just like it was intended to be.”
Source: Online WSJ
Posted by Steven Maimes, The Trust Advisor.